Monthly Archives: September 2016

An Approach to Policy Change?

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Referring to George Soros’ bid to influence elections for local prosecuting attorneys, Scott Bland writes,

His money has supported African-American and Hispanic candidates for these powerful local roles, all of whom ran on platforms sharing major goals of Soros’, like reducing racial disparities in sentencing and directing some drug offenders to diversion programs instead of to trial.

This is not my area of expertise. But if we have a huge surplus of laws on the books, then perhaps electing prosecutors who will selectively enforce the laws that you like is a powerful way to influence policy. Am I wrong about that?

The Case for Sticking with the Null Hypothesis

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Jesse Singal writes,

As things continue to unfold, there will be at least some correlation between which areas of research get hit the hardest by replication issues and which areas of research offer the most optimistic accounts of human nature, potential, and malleability.

Pointer from Tyler Cowen.

Studies that show significant effects of educational interventions are right in this wheelhouse. That is why until they are scaled, replicated, and shown to have durable effects, you should view accounts of such studies with skepticism.

College Loan Default Not Related to High Tuition?

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Jason Delisle says,

But if you get in the heads of people — and I did a focus group on this a year ago — you maybe went to school, it turns out it wasn’t for you or the school misled you, or you didn’t get a job in that field, and so you’re not really excited about paying back your $8,900 because you feel like you didn’t get anything for it.

Affluent people assume that student loan debt must be related to the high tuitions at top-tier schools with which they are familiar. DeLisle says that instead many of the defaults are occurring at lower-tier schools. The tuition and debt levels are low, but the students do not think they got anything out of the school, so they are reluctant to repay loans.

There is much more in this depressing interview. It is depressing how much of a discrepancy there is between a sensible policy on higher education and what we are actually likely to see.

Why You Don’t Have to Change Your Mind

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James Surowiecke writes,

Obamacare is being hobbled by the political compromises made to get it passed. ..

Conservatives point to Obamacare’s marketplace woes as evidence that government should stop mucking around with health insurance. In fact, government hasn’t mucked around enough: if we want to make universal health insurance a reality, the government needs to do more, not less.

Pointer from Mark Thoma.

A while back on twitter, someone pointed me to a passage from David Deutsch.

The key defect of compromise policies is that when one of them is implemented and fails, no one learns anything because no one ever agreed to it.

So, one side says that the stimulus failed because stimulus does not work. The other side says that it worked, but there was not enough of it. One side says Obamacare has not achieved its objectives because it is a flawed concept. The other side says that “government hasn’t mucked around enough.”

If you wanted to create accountability in politics, you could say, “You can have your way, but if the results do not conform to your promises, you lose power.” But things are never that clean.

With markets profits and losses ensure accountability. When your firm loses enough money, you can insist that you were right all along and just ran into bad luck, but nonetheless you go out of business.

Wisdom from Hal Varian

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He writes,

Self-driving cars are rapidly becoming a reality. In fact, we would have self-driving cars now if it weren’t for the randomness introduced by human drivers and pedestrians. One solution to this problem would be restricted lanes for autonomous vehicles only. Self-driving cars can communicate among themselves and coordinate in ways that human drivers are (alas) unable to. Autonomous vehicles don’t get tired, they don’t get inebriated, and they don’t get distracted. These features of self-driving cars will save millions of lives in the coming years.

It is a wide-ranging essay. Here is more:

Back in 2000, about 80 billion photos were taken worldwide—a good estimate since only three companies produced film then. In 2015, it appears that more than 1.5 trillion photos were taken worldwide, roughly 20 times as many. At the same time the volume exploded, the cost of photos fell from about 50 cents each for film and developing to essentially zero.

So over 15 years the price fell to zero and output went up 20 times. Surely that is a huge increase in productivity. Unfortunately, most of this productivity increase doesn’t show up in GDP, since the measured figures depend on the sales of film, cameras, and developing services, which are only a small part of photography these days.

In fact, when digital cameras were incorporated into smartphones, GDP decreased, camera sales fell, and smartphone prices continued to decline. Ideally, quality adjustments would be used to measure the additional capabilities of mobile phones. But figuring out the best way to do this and actually incorporating these changes into national income accounts is a challenge.

Wisdom from Erik Hurst

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He says,

The facts are real wages moved very strongly with employment across regions. Nevada was hit very hard by the recession, for example, while Texas was hit much less hard. Wage growth, both nominal and real, was about 5 percent higher in Texas than it was in Nevada during the Great Recession.

Pointer from Tyler Cowen.

The point is that we do not have a single aggregate economy. If you think that every state faced identical demand conditions, then the state with the higher real wage growth (Texas) should have had the worse unemployment. And Hurst goes on to point out how the regional data make it difficult to defend the view that wage stickiness is the cause of unemployment. In fact, he refers to work, which I noticed earlier, that suggests a PSST story.

I don’t think I previously knew about this thinking, which also agrees with mine:

When we all come together as individuals, we may create agglomeration forces that produce positive or negative consumption amenities. Thinking about it this way, when a lot of high-income people live together, maybe there are better schools because of peer effects or higher taxes. Or maybe there are more restaurants because restaurants are generally a luxury good. Or maybe there’s less crime because there is an inverse relationships between neighborhood income and crime, which empirically seems to hold. So, while we value proximity to firms, that’s not the only thing we value.

Who Needs Liquidity?

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Lynn Stout writes,

Wall Street is providing far more liquidity (at a hefty price—remember that half-trillion-dollar payroll) than investors really need. Most of the money invested in stocks, bonds, and other securities comes from individuals who are saving for retirement, either by investing directly or through pension and mutual funds. These long-term investors don’t really need much liquidity, and they certainly don’t need a market where 165 percent of shares are bought and sold every year. They could get by with much less trading—and in fact, they did get by, quite happily. In 1976, when the transactions costs associated with buying and selling securities were much higher, fewer than 20 percent of equity shares changed hands every year. Yet no one was complaining in 1976 about any supposed lack of liquidity. Today we have nearly 10 times more trading, without any apparent benefit for anyone (other than Wall Street bankers and traders) from all that “liquidity.”

Pointer from Mark Thoma.

I was appalled by this paragraph (and by others in her essay), for a number of reasons.

1. It appears on a site calling itself “pro-market.” The conceit is that they are battling crony capitalism. However, the essay does not assert, much less establish, any connection between cronyism and trading volume.

2. Note that since 1976, some activities have been affected by the advent of a device known as the computer chip. The fact that we have nearly 10 times as much trading as then should be no shock. The cost of trading has likely fallen by way more than 10 times (feel free to compare brokerage charges adjusted for inflation). Who is Lynn Stout to suggest that the price elasticity of trading ought to be zero?

3. I would appreciate it if Lynn Stout could tell us how she thinks we should measure the benefit of liquidity. I believe that any thoughtful economist would say that this is a difficult issue. I have said that as individuals and nonfinancial firms we wish to hold liquid, riskless assets and issue risky, illiquid liabilities. Financial firms do the opposite. I am quite sure that this produces real benefits. But I would be hard pressed to arrive at even a conceptual approach to quantifying those benefits.

I believe that there is cronyism embedded in the relationship between Wall Street and Washington. But that does not justify pure demagogic bashing of investment bankers.

Trump Explanation to Flatter the Right

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William Voegeli writes,

When Trump says political correctness cripples our ability to think, talk, and act against terrorism, he’s signaling that our response to terrorism is severely compromised by Islamophobia-phobia—the closed-minded, contrived, overwrought, unwarranted, misdirected, counterproductive fear that accurate threat assessments and adequate self-defense might hurt a Muslim’s feelings. “Public sentiment is everything,” said Lincoln of a republic’s political life, which means that those who mold public sentiment are more powerful than legislators and judges, because they make “statutes and decisions possible or impossible to be executed.” Our molders of public sentiment have made citizens more worried about accusations of bigotry than they are determined to report possible terrorism. A man working near the San Bernardino shooter’s home, according to one news account, “said he noticed a half-dozen Middle Eastern men in the area” before the attack, “but decided not to report anything since he did not wish to racially profile those people.”

The essay is long, but I recommend all of it. Along the way, Voegeli quotes Megan McArdle approvingly and refers to Bryan Caplan disparagingly.

Voegeli links Trump’s surge in popularity to the high-profile attacks by Islamic terrorists. While I believe that those helped him, and that another one could hand him the election, I am inclined to believe that he would have obtained the nomination even if those attacks had not taken place. If my guess is correct, then by seeing Trump support primarily as a reaction against political correctness, Voegeli is overly uncharitable to the left and he is overly flattering to the right.

Voegeli sees Trump as comparable to Senator Joseph McCarthy. Voegeli sees each as a champion of a good cause, which they ultimately discredit with their idiosyncratic and erratic behavior. My thoughts:

1. McCarthy’s cause was anti-Communism. His enemies complained of anti-Communist hysteria. I am so steeped in David Halberstam that I am not ready to concede that McCarthy discredited anti-Communism or to concede that the anti-Communists had it right. What discredited anti-Communism was the Vietnam War, which the anti-Communists got wrong.

2. I think that Voegeli somewhat mis-characterizes Trump’s cause. Trump does not want to slay the dragon of Islamic radicalism. In my reading, Trump’s cause is anti-cosmopolitanism. Cosmopolitans see the world through the eyes of an affluent tourist. Foreign countries are places that take Visa, with interesting foods and friendly people speaking accented English. Anti-cosmopolitans might see the world through the eyes of an American soldier sent to Iraq or Afghanistan. Foreign countries are places where barbarians lurk. Even when we succeed for a while at protecting ordinary people from these barbarians, the people are neither grateful to us nor inspired by us to keep the barbarians from returning.

The anti-cosmopolitan motto might be “Keep the U.S. out of the Middle East, and keep the Middle East out of the U.S.” The conservative establishment is heavily invested in keeping us in the Middle East. The liberal establishment is heavily invested in allowing Middle Easterners to come here. Perhaps it was inevitable that the champion of anti-cosmopolitanism was an outsider with many off-putting personality traits. But it could be that a loss by Trump will only discredit Trump, and anti-cosmopolitanism will, for better or worse, remain a force that affects American policy going forward.

Trump Explanation to Flatter the Left

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Arlie Russell Hochschild writes,

You are patiently standing in the middle of a long line stretching toward the horizon, where the American Dream awaits. But as you wait, you see people cutting in line ahead of you. Many of these line-cutters are black—beneficiaries of affirmative action or welfare. Some are career-driven women pushing into jobs they never had before. Then you see immigrants, Mexicans, Somalis, the Syrian refugees yet to come. As you wait in this unmoving line, you’re being asked to feel sorry for them all. You have a good heart. But who is deciding who you should feel compassion for? Then you see President Barack Hussein Obama waving the line-cutters forward. He’s on their side. In fact, isn’t he a line-cutter too? How did this fatherless black guy pay for Harvard? As you wait your turn, Obama is using the money in your pocket to help the line-cutters. He and his liberal backers have removed the shame from taking. The government has become an instrument for redistributing your money to the undeserving. It’s not your government anymore; it’s theirs.

Pointer indirectly from Tyler Cowen.

She sees this as a narrative that explains Trump. Perhaps she is correct. But it is suspiciously self-serving to the sociologist-author who is proud to be more properly attuned to the oppression of minorities) and uncharitable to the Trump supporters.

I am not the first person to notice that many economists came up with books after the financial crisis of 2008 that purported to show how the crisis confirmed their worldview. Yet none of these economists predicted the crisis. For example, Joseph Stiglitz will gladly tell you that the crisis confirmed his worldview, even though he notoriously co-authored a paper which concluded that Freddie Mac and Fannie Mae were completely sound.

So with the unexpected emergence of Donald Trump, I get very suspicious of “explanations” that flatter the author and members of the author’s intended audience.

Instead, I again recommend the Martin Gurri explanation, which he wrote before Trump became a candidate.